Task: Macro-economic choices, particularly in the areas of fiscal policy, are not just about economics but about political philosophies, values and goals. This Case asks you to think about some of these dimensions.
Question 1. Do all government purchases have the same effect on aggregate demand? Defend your answer with economic reasoning.
Question 2. Suppose a country increases government purchases by $100 billion. Suppose the multiplier is 1.5 and the economy's real GDP is $5,000 billion.
a. In which direction will the aggregate demand curve shift and by how much?
b. Why is the change in real GDP is likely to be smaller than the shift in the aggregate demand curve?
Question 3.
a. What is "crowding out," and how does it reduce private investment?
b. Given that only certain types of government expenditures crowded out private investment, what are the implications for fiscal policy choices